Eurozone Ministers Agree To Boost Firewall

3/30/2012 8:55 AM ET

Eurozone finance ministers decided to raise the combined size of the region's bailout funds to prevent the possible spillover of the debt crisis in some member states.

The ceiling for lending by the European Stability Mechanism (ESM) and European Financial Stability Facility (EFSF) will be increased to EUR 700 billion, the Eurogroup, which represents euro area finance ministers, said in a statement on Friday.

The maximum aid comprise of EUR 500 billion of the permanent fund ESM and EUR 200 billion already committed by the temporary rescue fund EFSF to Greece, Ireland and Portugal.

At the meeting held in Copenhagen, ministers supported to run in parallel the temporary EUR 440 billion EFSF with the permanent EUR 500 billion ESM until mid-2013.

The unused EUR 240 billion in the temporary fund can be used only if the lending capacity of the ESM proves insufficient. The ESM will be the main instrument to finance new programmes as from July 2012.

Initially, Germans were against the proposal to lift the rescue fund. However, Spain missing the budget target in 2011 increased the need for strengthening the firewall.

It was as far as the German government was willing to go and it was the minimum most other Eurozone countries were expecting, ING Bank NV's Senior Economist Carsten Brzeski said. A bigger increase along the lines of earlier discussed options could have sent a stronger signal and would have been more convincing, he added.

After today's move, the maximum lending volume of ESM is envisaged at EUR 500 billion by mid-2013. The combined lending ceiling of the ESM and the EFSF will continue to be set at EUR 700 billion, the statement said.

"All together the euro area is mobilizing an overall firewall of approximately EUR 800 billion, more than USD 1 trillion", Eurogroup added.

Further, Eurozone members have committed to provide EUR 150 billion additional bilateral contributions to the International Monetary Fund.